SUCCESS OF RIFLEX ACCOUNT RELAUNCHES RECRUITING AND INFLOWS

Transcription

1 Mediolanum Italy Asset gathering BUY (unchanged) TARGT 6.7 August 4, 2005 Price : 5.44 BCI Index: 1,621 N 317 SUCCSS OF RIFLX ACCOUNT RLAUNCHS RCRUITING AND INFLOWS We have met with Mediolanum to get an update on recent developments. Our impression is that, thanks to the success of the Riflex account, the company has at long last reversed the negative trend of the two main leading indicators of future growth, i.e. the number of financial advisors and the number of current accounts. In 2005 Mediolanum has introduced a scheme that is more rewarding for advisors but obliges them to cross-sell so that the company spends more but also earns more. Net new accounts (i.e. after deduction of closures) are now continuing at a rate of 5,000-6,000 per month. Via Riflex Mediolanum achieves a number of objectives. The account in fact: Facilitates recruitment of junior advisers because it is relatively easy to open current accounts, meaning that there is immediately a source of income and a customer base on which to perform crossselling Aids the increase of inflows through cross selling Increases the number of potentially wealthier customer (on average an accountholder customer has 4x the AUM of a customer without an account) We estimate that, as at the end of June, the Mediolanum network at long last returned to growth and that, in 2Q05, assets under administration was positive by 100 mn vs. breakeven ( 14 mn) in 1Q05. For FY2005 we have increased our estimate of NBV (new business value) by 5% to 184 mn, as the combined effect of lower life premiums and higher margins (thanks to good sales of pension schemes and single-premium unit-linked policies). In addition, we have raised estimated FY2005 net profit by 3% to 160 mn, mainly as a result of higher performance fees in 2Q05 (revised upwards from 15 mn to 27 mn thanks to the markets and USD). Mediolanum stock s de-rating has taken the P/V multiple to 1.5x and 2005 adjusted P/ multiple to 22x (20.6x ex speria and Mediobanca). De-rating was caused by the perception that Mediolanum was no longer able to be a growth stock. We believe that in September, with disclosure of 1H05 figures, it will be seen that the leading indicators of future growth have positively reversed their trend. The number of financial advisors is at long last growing, as are the customer base, the wealthiest customer segment (accountholders), and net inflow. We expect investors to rediscover Mediolanum after having totally neglected it for two years (its outright performance since 1/1/2004 is 14% as opposed to +31% for the urostoxx insurance index). Our target price is 6.7 per share, which corresponds to 1.7x 2006 V. STOCK DATA PRIC PRFORMANC Bloomberg Code MD IM 1M 3M 12M 52-week range Absolute Daily Volumes (mn) 3.2 Rel. to BCI Index Matteo Ghilotti m.ghilotti@eurosim.it CAPITALISATION FORCASTS/VALUATION 12/ /2005 Market Cap. 3,955 mn ADJ. PS ( cents) Latest AUM 25,791 mn ADJ. P/ Free Float 26% P/V Shares Outstanding (mn) 727 RoV % 19% 13% IMPORTANT DISCLOSURS APPAR AT TH BACK OF THIS RPORT

2 Mediolanum August 4, COMPANY VISIT We have met with Mediolanum to get an update on recent developments. Our impression is that, thanks to the success of the Riflex account (which has a maximum annual fixed cost of 60), the company has at long last reversed the negative trend of the two main leading indicators of future growth, i.e. the number of financial advisors and the number of current accounts. The market has penalised Mediolanum vs. Azimut (+3% since the beginning of the year vs. +58%) because the latter has very positive net inflows that, thanks to publication of mutual funds monthly figures, are also very visible. We however think that, when 1H05 figures are published on September 28th, core business improvement will also become evident for Mediolanum. TH KILLR APPLICATION FOR RTURNING TO GROWTH: TH RIFLX ACCOUNT In March this year Mediolanum decided to invest heavily to launch a new current account called Riflex. The total budget is about mn and will dampen the bank s accounts this year but management has seen a very attractive opportunity. The Italian press in fact frequently reports on the cost of bank current accounts and on how much it has increased in recent years (consumer TH RIFLX ACCOUNT associations estimate an increase of about +30% since 2001 to date). The Riflex account does not pay interest but has a maximum fee of 5 per month which is eliminated if the accountholder buys group products. The fee covers conventional banking services (bank-to-bank transfers, cash-dispenser withdrawals from any bank, utility bills, etc.) The maximum cost of 60/year compares with that of a traditional bank s typical current account of around 250/year. In the past Mediolanum has incentivated the Source: Company presentation network to sell current accounts but offering the advisor a fixed payment of 50 for each new account opened. In 2005 it has instead introduced a scheme that is more rewarding for advisors but obliges them to cross-sell so that the company spends more but also earns more. The scheme envisages that 1 point is awarded for each account opened with further points being awarded according to the products purchased by the same customer. ach month the total score notched up by the advisor becomes a percentage that increases his/her entry fee for the month in question. In other words, if an advisor collects 20 points and has generated 10,000 of entry fees by selling policies and/or funds, in that month he will be accorded NT No. OF BANK ACCOUNTS OPND an extra bonus of 2,000. The next month he starts again from zero. This scheme makes opening of new accounts monetarily very attractive if advisors are effective cross-sellers. Net new accounts (i.e. after deduction of closures) are now continuing at a rate of 5,000-6,000 per month. This is an eminently respectable figure both in relative terms (Mediolanum has 350,000 current accounts and 780,000 customers) and on an outright basis. IMPORTANT DISCLOSURS APPAR AT TH BACK OF THIS RPORT Source: Company presentation

3 Mediolanum August 4, Why bet so heavily on new current accounts? Because Mediolanum is convinced that the killer application in terms of restoring the advisor network and net inflow to growth. The advisor network Similarly to all advisor networks, the Mediolanum network suffered the negative impact of the crisis. MDIOLANUM: NR OF LICNSD FINANCIAL ADVISORS 4,200 4,100 4,000 3,900 3,800 3,700 3,600 3,500 3,400 1Q02 2Q02 3Q02 4Q02 1Q03 2Q03 3Q03 4Q03 1Q04 2Q04 3Q04 4Q04 1Q05 2Q05 Source:company data and uromobiliare SIM estimates But shrinkage of the number of advisors also continued in because Mediolanum s business model is based on the recruitment of juniors and of selected seniors coming from the banking industry. Mediolanum rarely assumes senior sales people coming from other networks because it does not want to pay goodwill and also wants to "imprint" its advisors right from the start. Juniors are less attracted to work as advisors due to the difficulty of achieving an adequate income when savers are as adverse to risk as they have been in the last three years. In order to break this vicious circle, Mediolanum has introduced the Riflex account and the incentive mechanism described earlier. During an extenuating series of meetings the network met some 60,000 potential candidates and offered them the possibility of becoming the manager of their branch of Banca Mediolanum. It is relatively easy to convince a potential customer to open a Riflex account (it costs much less than a current account with a traditional bank) and, by so doing, the advisor: Starts to earn immediately Creates his/her own customer base on which to undertake cross-selling. We estimate that, as at the end of June, the Mediolanum network at long last returned to growth. MDIOLANUM: TH XPCTD VOLUTION OF TH NTWORK 1Q04 2Q04 3Q04 4Q04 1Q05 2Q05 Licensed Financial Consultants 4,049 4,055 4,078 4,048 4,015 4,025 Source: Company data & uromobiliare SIM estimates Assets under administration In the last few quarters Mediolanum has been very effective in converting non-managed assets into assets under management. The market, however, has been concerned by the continuous decline in the Mediolanum system s total net inflow. IMPORTANT DISCLOSURS APPAR AT TH BACK OF THIS RPORT MDIOLANUM NT INFLOWS (core; mn) Life 903 1,021 1,117 1,411 1,399 Mutual funds 1,116 1, Total managed assets 2,019 2,045 1,674 1,856 1,346 Non-managed assets 1,206 1,392 1, Total net inflows (core) 3,225 3,437 3,059 1,543 1,265 Source: Company data

4 Mediolanum August 4, Accelerating in the opening of current accounts should have finally driven assets under administration, which we estimate to have been positive by 100 mn in 2Q05 vs. breakeven ( 14 mn) in 1Q05. AUM PR CUSTOMR - as at March 31, 2005 This trend should strengthen in future, given that, on average, an accountholder customers as 4x the AUM of a customer without an account. * Out of 12 Products; Bank Account, Credit Cards, Stock Portfolio, Mutual Funds, Managed Accounts, Index-linked Policies, Pension Plan, Other Life Products, Nonlife Products, Home Mortgages, Direct Channels (0-2) Source: Company presentation MUTUAL FUNDS Mediolanum has made geographical diversification one of its watchwords. For this very reason its customers have very marked exposure to the USD, due to the weight of the US market and of dollar-pegged emerging countries. 70% of funds assets are in equities and, of this 70%, about half is exposed to the USD. The USD therefore accounts for about 35% of total assets. This explains both disappointing performance in 2004 and sparkling recovery in As at the end of June the average performance of all Mediolanum funds (including bond and money market funds) was in excess of 9%. In future months we expect this performance to translate into an increase of total inflows something that did not happen in 2004 because the excellent performance of uropean markets was burnt up by the USD s slump. Funds excellent performance has also prompted us to increase estimated performance fees in 2Q05 from 15 mn to 27 mn. LIF INSURANC For 2Q05 we expect to see premiums slightly down vs. 2Q04 but with a marked improvement in mix: Annual premiums should be flat (as in 1Q05) but still with a heavy incidence of pension schemes compared with shorter policies (life funds) Single premiums (-15%) should instead have been penalised by a physiological decrease in indexlinked policies but unit-linked policies investing in hedge funds, which have higher margins, are very successful. We have not included planned reform of the Italian employee severance indemnity system in our estimates because (a) timing for approval is very tight (beginning of October) and (b) thus far the government has failed to find a position capable of reconciling the interests of the various lobbies involved. Mediolanum, however, has demonstrated that it is able to grow in the pension-planning market with any need for further tax benefits and the reform would therefore be incremental to our forecasts. RVISION OF FY2005 STIMATS New business value We have increased our estimate of NBV by 5% to 184 mn, as the combined effect of lower life premiums and higher margins. In funds we made a fractional upward adjustment (from 31 mn to 32 mn) to reflect a mix effect but we think we have been cautious, if markets do not suffer any abrupt downturns, because we expect Mediolanum customers to be more inclined to invest, and to invest in equities. IMPORTANT DISCLOSURS APPAR AT TH BACK OF THIS RPORT

5 Mediolanum August 4, MDIOLANUM: NW BUSINSS VALU ( mn) Prev. Current Life premiums New annual premiums Single premiums (1/10) Total new premiums (AP) Change 4% 3% Life margins Margin on annual premiums 64% 60% 62% Margin on single premiums 30% 30% 32% Total margin 50% 46% 48% New business value of which Life insurance, Italy of which AM Total NBV Change 0% 5% Source: uromobiliare SIM estimates Net profit We have also raised estimated FY2005 net profit by 3% to 160 mn, mainly as a result of higher performance fees, which affect mutual funds accounts and, in part, those of the bank. MDIOLANUM: OLD AND NW 2005 STIMATS ( mn) Old New Pre-tax Profit (core, Italy): Life Business Mutual Funds Bank Other Total Pre-tax Profit in Italy Spain Germany Banca speria Net profit Change % 9% 13% Source: uromobiliare SIM estimates CONCLUSIONS We have met with Mediolanum to get an update on recent developments. Our impression is that, thanks to the success of the Riflex account, the company has at long last reversed the negative trend of the two main leading indicators of future growth, i.e. the number of financial advisors and the number of current accounts. The market has penalised Mediolanum vs. Azimut (+3% since the beginning of the year vs. 58%) because the latter has very positive net inflows that, thanks to publication of mutual funds monthly figures, are also very visible. We however think that, when 1H05 figures are published on September 28th, core business improvement will also become evident for Mediolanum. In the past Mediolanum has incentivated the network to sell current accounts but offering the advisor a fixed payment of 50 for each new account opened. In 2005 it has instead introduced a scheme that is more rewarding for advisors but obliges them to cross-sell so that the company spends more but also earns more. Net new accounts (i.e. after deduction of closures) are now continuing at a rate of 5,000-6,000 per month. Via Riflex Mediolanum achieves a number of objectives. The account in fact: Facilitates recruitment of junior advisers because it is relatively easy to open current accounts, meaning that there is immediately a source of income and a customer base on which to perform cross-selling Aids the increase of inflows of both administered and managed assets. Increases the number of potentially wealthier customer (on average an accountholder customer has 4x the AUM of a customer without an account) IMPORTANT DISCLOSURS APPAR AT TH BACK OF THIS RPORT

6 Mediolanum August 4, We estimate that, as at the end of June, the Mediolanum network at long last returned to growth and that, in 2Q05, assets under administration was positive by 100 mn vs. breakeven ( 14 mn) in 1Q05. For FY2005 we have increased our estimate of NBV (new business value) by 5% to 184 mn, as the combined effect of lower life premiums and higher margins (thanks to good sales of pension schemes and single-premium unit-linked policies). In addition, we have raised estimated FY2005 net profit by 3% to 160 mn, mainly as a result of higher performance fees in 2Q05 (revised upwards from 15 mn to 27 mn thanks to the markets and USD). Mediolanum stock s de-rating has taken the P/V multiple to 1.5x and 2005 adjusted P/ multiple to 22x (20.6x ex speria and Mediobanca). MDIOLANUM: ADJ. P/ X MDIOBANCA AND SPRIA ( mn) Adj. net profit MB's dividend speria's net profit Adj. net profit ex MB and speria Market cap 3,945 3,945 MB's stake speria's stake Market cap ex MB and speria 3,544 3,519 Adj. P/ ex Mediobanca and speria Source: uromobiliare SIM estimates De-rating was caused by the perception of Mediolanum being able to defend profitability extremely well even in a bear market but that it was no longer able to be a growth stock. We believe that in September, with disclosure of 1H05 figures, it will be seen that the leading indicators of future growth have positively reversed their trend. The number of financial advisors is at long last growing, as are the customer base, the wealthiest customer segment (accountholders), and net inflow. NT INFLOWS (core) Life 1,117 1,411 1,399 1,307 1,350 1,300 Mutual funds Total managed assets 1,674 1,856 1,346 1,307 1,657 1,774 Non-managed assets 1, Total net inflows (core) 3,059 1,543 1,265 1,471 1,752 2,084 Source: uromobiliare SIM estimates We expect investors to rediscover Mediolanum after having totally neglected it for two years (its outright performance since 1/1/2004 is 14% as opposed to +31% for the urostoxx insurance index). Our target price is 6.7 per share, which corresponds to 1.7x 2006 V. IMPORTANT DISCLOSURS APPAR AT TH BACK OF THIS RPORT

7 Mediolanum August 4, MAIN FIGURS ( mn) NW LIF PRMIUMS COLLCTD ( mn) Premiums 2,063 2,309 2,569 2,751 2,940 FIRST YAR Change -3% 12% 11% 7% 7% Change 34% -3% Net Fees SINGL PRMIUMS 1,178 1,282 1,433 Change 19% -4% 15% 3% 8% Change 9% 12% Pre Tax Income Change 38% 27% 13% 10% 14% Net Income BRAKDOWN OF PR TAX PROFITS (Italy; mn) Change 58% 9% 13% 10% 14% New Business Value Change -34% 14% 5% 10% 9% Life Business mb. V. arnings Mutual Funds Change 94% 42% -19% 9% 9% Bank MB. VALU 2,029 2,354 2,579 2,825 3,094 Total ROV 15% 19% 13% 13% 13% Change 31% 13% 11% PR SHAR DATA (PS and DPS in cent) MB. V. ARNINGS ( mn) ps , Change 58% 9% 13% 10% 14% xisting business ps Adj xpected Increase in V Change 58% 5% 12% 9% 12% Change in assumptions mb. Value Variance in assumptions Dividend VA from ex. business MARKT RATIOS New business value of w hich Life insurance, Italy P of w hich AM P Adj Total NBV Goodwill vs NBV P/MB. V Total V earnings Yield 2.0% 2.7% 2.8% 3.0% 3.4% OTHR FIGURS ( mn) COMPANY VALUATION ( mn) Total v alue of mutual funds 860 Net Inf. Of Man. Assets 1,856 1,346 1,307 1,657 1,774 Total v alue of Life business 3,571 Net Inf. Of Non M. Assets Mediobanca's mkt price 239 Total Net Inflows 1,543 1,265 1,471 1,752 2,084 Banca speria's 5% AUM 160 Assets Um 23,514 25,791 29,177 32,506 36,328 Free capital 64 Change 12% 10% 13% 11% 12% Company evaluation 4,895 Ifas 4,052 4,048 4,065 4,115 4,215 Value per share 6.7 Source: uromobiliare SIM estimates IMPORTANT DISCLOSURS APPAR AT TH BACK OF THIS RPORT

8 Mediolanum August 4, This publication has been prepared by Matteo Ghilotti In the past uromobiliare SIM has published studies on Mediolanum DISCLAIMR uromobiliare SIM is distributing this publication to some 500 qualified operators and to unqualified operators by mail and electronic communications systems as from October 3, 2005 uromobiliare SIM intends to provide continuous coverage of the financial instrument forming the subject of the present publication, with a semiannual frequency and, in any case, with a frequency consistent with the timing of the issuer s periodical financial reporting and of any exceptional event occurring in the issuer s sphere of activity. The information contained in this publication is based on sources believed to be reliable. Although uromobiliare SIM makes every reasonable endeavour to obtain information from sources that it deems to be reliable, it accepts no responsibility or liability as to the completeness, accuracy or exactitude of such information uromobiliare SIM has adopted internal procedures able to assure the independence of its financial analysts and that establish appropriate rules of conduct for them. However, it is pointed out that uromobiliare SIM SpA is an intermediary licensed to provide all investment services as per Italian Legislative Decree no. 58/98. Given this, uromobiliare SIM might hold positions in and execute transactions concerning the financial instruments covered by the present publication, or could provide, or wish to provide, investment and/or related services to the issuers of the financial instruments covered by this publication. Consequently, it might have a potential conflict of interest concerning the issuers, financial issuers and transactions forming the subject of the present publication. As on today s date it has been ascertained that, as regards the listed companies covered by the present publication, the Credem group (to which uromobiliare SIM belongs) does not have relationships of control or major shareholdings, either direct or indirect, with/in the same. However, Credem group could provide them with corporate finance services, could have issued financial instruments linked to the issuers stock and could have directors who are members of the issuers corporate bodies. AbaxBank S.p.A. (Credem Group) has issued financial instruments whose return is linked to one or more securities issued by MDIOLANUM SPA AbaxBank S.p.A. (Credem Group) performs the role of market maker for financial instruments whose underlying assets are shares issued by MDIOLANUM SPA AbaxBank S.p.A. (Credem Group) performs the role of market maker for financial instruments whose underlying assets are shares issued by MDIAST SPA In addition, it is pointed out that, within the constraints of current internal procedures, uromobiliare SIM s directors, employees and/or outside professionals might hold long or short positions in the financial instruments covered by this publication and buy or sell them at any time, both on their own account and that of third parties. The purpose of this publication is merely to provide information that is up to date and as accurate as possible. The publication does not represent to be, nor can it be construed as being, an offer or solicitation to buy, subscribe or sell financial products or instruments, or to execute any operation whatsoever concerning such products or instruments. uromobiliare SIM does not guarantee any specific result as regards the information contained in the present publication, and accepts no responsibility or liability for the outcome of the transactions recommended therein or for the results produced by such transactions. ach and every investment/divestiture decision is the sole responsibility of the subject receiving the advice and recommendations, who is free to decide whether or not to implement them. Therefore, uromobiliare SIM and/or the author of the present publication cannot in any way be held liable for any losses, damage or lower earnings that the subject using the publication might suffer following execution of transactions on the basis of the information and/or recommendations contained therein. The estimates and opinions expressed in the publication may be subject to change without notice. MOST RCNT RCOMMNDATIONS: Date Rec. Comment 13 May 2004 ACCUMULAT 10 September 2004 ACCUMULAT 11 November 2004 BUY change in estimates/valuation 23 March 2005 BUY 12 May 2005 BUY IMPORTANT DISCLOSURS APPAR AT TH BACK OF THIS RPORT